Monday, January 17, 2005

When I wrote this morning's post I had not seen two articles by Nicholas Confessore and Roger Lowenstein in yesterday's New York Times Magazine dealing with the same issues. Both are interesting, but I have no note that Lowenstein, who wrote on Bush Administration plans for the tax code, didn't mention the extraordinary fall in personal and corporate income tax receipts over the last four years and the increased role of the payroll tax in paying for the deficit. Nor did Confessore, while reporting that critics argue that the Trust Fund is worthless, mention that the US Constitution guarantees it--although he did mention that the Social Security Administration has been able to draw on the Trust Fund as necessary in years past. In any case, I urge anyone interested in these issues to read those articles as well.

I'm a historian, not an economist, but Economics 1 was easily the best course of my freshman year in college and I've always had a head for statistics--originally developed poring over baseball averages. Figures tell stories, as I learned writing my first book, and with the advent of the web and Microsoft Excel, manipulable figures on almost any topic are just a few key-strokes away. Prompted by the controversy over Social Security, I've decided to investigate some basic data about federal finances. It took me only an hour or so to make a series of remarkable discoveries, all, I think, highly relevant to the current debate, and none of them published, as far as I know, in any major media outlet. Even Paul Krugman, on whom I, like so many others, rely both for factual data and emotional sustenance, has only scratched the surface of what is happening to the finances of the federal government and what the Social Security controversy is really about. Taking the advice I have been giving my own students, I shall begin by presenting my conclusions first.
1. We are at the climax of a long-term shift in federal taxes from personal and corporate income taxes, whose fairly steady decline since the Reagan Adminstration has become a cascade, to payroll taxes, which are regressive, not progresssive.
2. The Bush Administration, whose acolytes like to talk about shrinking the federal government until they can drown it in a bathtub, have taken a huge step towards doing just that. For the first time in modern American history, they have managed to substantially reduce federal revenues for four consecutive years, and it is far from clear that there is any end in sight.
3. The Bush Administration's claim that Social Security will be bankrupt in 2018 amounts to a theft of approximately $600 billion in principal and another $800 billion in interest that workers--most of them Baby Boomers--have been paying in excess payroll taxes since 1983 to make sure that they would get the same level of benefits that they have already been financing for their parents. This is both unconscionable and unconstitutional.
Had it not been for the Bush tax cuts, the Social Security problem could in fact have been handled quite easily. The phoney "crisis" is in all probability designed to continue collecting payroll taxes--which have reached nearly half the income of the federal government--without using them for the purpose for which they were designed--to pay benefits to retirees at a liveable level.
4. Although these facts are critical to the future of nation, not one American in a hundred, I would estimate, knows them.

Here is the data.

1. The New Deal established the basic structure of American taxation that prevailed from the 1950s through the 1970s--a mix of personal income taxes, corporate income taxes, and Social Security taxes. The Second World War increased the share of personal income taxes in federal revenues from less than 20% to over 45%, and personal income taxes kept a share of 42-46% until the mid-90s, when that share began to rise, presumably as a consequence of the Clinton tax increase on upper brackets and the stock market boom. Meanwhile, however, the share of corporate income taxes was falling--from 29% in the early 1950s to 26% in the late 1950s, 21% in 1960-69, 14-15% in 1970-79, 9% in 1980-89 (the Reagan tax cuts had a much more significant impact on corporate income, obviously), but back up to 10% in the early 1990s and 12% in the late 1990s. I wonder whether even 100 Americans could explain how all this happened. While I am a relatively well-informed American, I can only remember a couple of periods (in the early Reagan years and in 2003) when corporate tax rates were the subject of much public comment, and I suspect that much of the secular decline reflects the work of tax lawyers, whose profession attracts a shocking number of the smartest and most dedicated individuals that our educational system turns out.
With income taxes declining, social security receipts have filled the gap. Between 1946 and 2000 they grew from 8% to 32% of federal revenues. Social security is a regressive tax. It now amounts to 7.6% (including Medicare payments) of everyone's paycheck, unless one makes more than about $90,000 a year, at which point the OASDI portion of the tax is capped and the percentage FALLS. The increase in the share of the tax was fairly steady, although its share fell, briefly, during the 1990s as the share of income taxes rose. To recapitulate the effects of the second half of the twentieth century, in fiscal 1947 (the first postwar year), the shares of personal income, corporate income, and payroll taxes were 47&, 22%, and 9%. (Excise taxes made up most of the remainder.) In fiscal 2000 the shares were 50%, 10%, and 32%.

2. Something unprecedented and catastrophic happened during the first Bush Administration. The share of personal income taxes has fallen from 50% in 2001 to 46% in 2002 and 45% in 2003, and it is projected to fall to 43% in fiscal 2004 (which ended last September) and stay there. (The share is projected to rise again beginning in 2008, but only because the Bush II tax cuts are supposed to be restored then--something the President has already declared his intention to avoid). The corporate share, meanwhile, has fallen from 10% to 7%. More significantly, the absolute, not relative, receipts from personal and corporate income taxes has dropped in every year of this Administration--a fact of which Grover Norquist and company must be proud indeed. Personal income receipts have fallen from $994 billion in 2001 to a projected $764 billion in 2004, while corporate receipts fell steadily from $151 billion in 2001 (down from $207 billion in 2000, before the NASDAQ bubble burst) down to $132 billion in 2003 (a rise to$168 billion was projected for 2004.) No previous tax cut or recession has ever caused these revenues to fall for more than two years, and in every case the decrease was more than made up in the following year. The Bush Administration has managed to cut total federal revenues 12% in just 4 years--an incredible, and disastrous, achievement.
And they have done so even though social security payroll receipts have continued to increase--from $694 billion in 2001 to $743 billion (projected) last year. As a result, the regressive payroll tax now brings in nearly as much as personal and corporate income taxes combined--41% of all federal revenues, as opposed to 43% for corporate and personal income taxes. And this brings us to the ghastly betrayal the Administration is now trying to sell the American people--the attempt to break the contract the Reagan Administration made with Baby Boomers and Gen Xers in 1983.

3. Revisions to Social Security in 1982 were designed to assure the retirement of at least the Baby Boomers by increasing payroll taxes well beyond the level required to pay current benefits. The excess went theoretically into the Social Security Trust Fund, composed of interest-bearing bonds issued by the Federal Treasury. The Social Security system had drawn on the already-existing trust fund to meet shortfalls in nine consecutive years from 1975 through 1983, including a shortfall of more than 10% in 1982 (indicating that the system can in fact draw on the Trust Fund--it is not, as Republicans now claim, a phoney asset.) After the 1983 increase receipts began to show an impressive surplus over expenditures, one that increased to $40 billion in 1990, fell to $7 billion in 1995, but increased again to $64 billion in 2001. Those figures do not include interest on the trust fund. Without interest, the increases in the Trust Fund since 1983 total $597 billion. With interest they total $1.353 trillion. The Boom generation, of which I have been so critical on other grounds, has put that money away for its future--at least in theory. Now the Bush Adminstration wants to take it away.
The problem, which Pat Moynihan pointed out almost immediately in the mid-80s and tried to do something about, was that the Social Security surpluses have simply gone into the treasury and been spent for other purposes, while interest-bearing bonds were deposited in the Trust Fund. This is what enabled Reagan and Bush I to create the permanent deficit, which Bill Clinton eventually eliminated (creating a surplus in excess of the extra money from Social Security by the time he left office) and which Bush II has now brought back with a vengeance. Actually, the famous date at which the Trust Fund will go into deficit (estimated at 2018) is actually the date at which the rest of the government will stop turning a profit on Social Security and will have to pay for its operations with income taxes. Since the Bush Administration's costly (though inconclusive) wars have kept increasing federal expenditures and since they are determined to cut taxes yet again, it's easy to see why that date must frighten them so much. But if the American people could adopt a sensible fiscal attitude and overcome twenty-five years of ferocious anti-tax propaganda, they would have little to fear. It is interesting, in any case, that tax-cutter George W. Bush, who has ruthlessly eliminated the estate tax and cut the rates on top brackets and dividends, hasn't even suggested cutting the regressive payroll tax, more than 10% of which is still being spent for purposes having nothing to do with Social Security or Medicare.
It is possible that some one within the Bush Administration has grasped the real significance of the 2018 date, at which money from the Trust Fund will have to be paid out, meaning that the Treasury will have to find cash to redeem the interest-bearing bonds it has been depositing there since 1983. And that is that under the 14th Amendment to the Constitution, the Treasury cannot escape that obligation. Section 4 of that Amendment--adopted to reassure the holders of the huge Civil War debt--states, "The public debt of the United States. . .shall not be questioned." The Republicans have to put through some drastic reform (including, presumably, a big cut in benefits) to make sure that point is not reached. Readers may draw their own conclusions about the morality of that approach.
I cannot tell if the Adminstration has in fact thought the problem through carefully or not. Here as in foreign policy, they may be driven purely by ideology and hatred of their parents' achievements, rather than by facts. But the course they are on fiscally can only be sustained (if at all) by an even greater reliance on payroll taxes than before, since they want to keep cutting income taxes. They evidently count on our not noticing that the payroll taxes aren't going where they are supposed to, and that they intend to default in 2018 on 36 years of promises to the workers who have been paying extra for their own old age since 1983.

4. It took me about three hours of work to produce this blog. I don't think it contains anything in it that any reasonably intelligent person could not understand, and simple searches and a few excel operations gave me the only data I needed. Yet I certainly am not aware of anywhere in the major media where the facts in it are available in a readable fashion--in fact I have never seen an analysis as complete as this one (and this one, I am sure, is far from complete.) Other than professional economists I honestly believe that the number of Americans conversant with these basic fiscal facts has fallen almost to 0--and even many professional economists are in thrall to anti-government ideology. Certainly our public educational system, which could easily teach this data, makes no effort to do so. The Administration's voice is the only one getting a hearing on these issues, and the Administration's arguments are ideological and disingenuous. Neither the media nor the opposition party are making a serious effort to investigate, let alone disseminate, these basic facts. How many people know, for instance, that we HAVE survived periods in which social security benefit payments exceeded receipts in the past? I didn't know that until I did this research. If the citizenry don't know the facts they cannot possibly arrange public affairs to their own benefit. Not only to they not know them, but I cannot see, at this moment, how they are likely to find out. And that leaves us living, in effect, under a committed ideological dictatorship on economic issues of enormous import for the rest of all our lives.

Sunday, January 09, 2005

Two weeks ago I saw The Aviator. As a film it dragged somewhat during the last hour, and it suffered from the dreadful miscasting of Cate Blanchett, who was made up to look about 55 at a time when Katharine Hepburn was not yet 40, and looked younger. But its historical accuracy seemed to me to be far above average, and Howard Hughes, who surely had an extraordinary life, got me thinking about the figure of the heroic businessman and how few such people my own generation has manged to produce.
Citizen Kane is usually listed as the greatest of all American films, and it has certainly been one of the most influential. Sooner or later most great directors try to emulate it, as Oliver Stone did, with considerable success, in Nixon, and Martin Scorsese has now done with Hughes. All told the tragic story of a rise and fall. Kane/Hearst, like Hughes, was born to money: Nixon truly had to struggle from the lower middle class on up. All three men were personally obsessive and eccentric; two (Hearst and Hughes) had colorful love lives; and in each case, the filmmaker gave a major psychological role to the protagonist's mother. Kane's mother shaped his life by sending him away at a tender age; Nixon's established a standard of perfection and emotional self-denial that no child could ever attain; and Hughes', Scorsese strongly suggests, sexually abused him. (Scorsese's portrait is particularly interesting not only because of the negative portrayals of women in most of his movies, but because he has been married five times himself.) And while each of these men sought public acclaim in youth and middle age, all three of them spent their declining years in almost complete isolation.
Yet through it all, all three of them left an enduring mark on American life. Hearst transformed journalism (not for the better, it must be said)
and built the first multi-media empire. Nixon had an extraordinary political career his foreign policies had a lasting impact, and his fall nobly epitomized American devotion to the rule of law. Hughes built newer, bigger and better airlines, and pioneered the development of continental and transcontinental aviation. Indeed, some of the best scenes in The Aviator showed Hughes at work--constantly pushing his subordinates to do the impossible, but usually in pursuit of a bold, brilliant and fundamentally sound concept, such as designing new rivets that would not increase air resistance or filming a First World War aerial dogfight realistically. One felt the presence of a genius who could really identify a possible breakthrough and push a large team of subordinates to achieve it. Some projects inevitably failed, but many succeeded.
The Boom generation is now entering its early sixties--and who have we produced who could match any of these three? Bill Gates and Steven Jobs have certainly had a comparable impact, although Gates, oddly, has shown no interest in creating a compelling public persona. Yet the tycoon who has--Donald Trump, who has combined a boom-and-bust real estate career with a self-promotion campaign that has now reached its apogee on reality TV--really does not deserve to be mentioned in the same breath, it seems to me, with either Hearst or Hughes. In two seasons of The Apprentice (which, I must admit, I have almost never missed), he has never given me the impression of a truly brilliant or commanding intelligence. While he browbeats his subordinates like Hughes or Kane, they did so in pursuit of great goals. Trump seems concerned only to show that his word is law and he reserves the right to act arbitrarily. And he has come to love the disgraceful tactic of setting his subordinates against one another. This may be because his producer Mark Burnett likes it, but if so, that only confirms that Trump, unlike any really great leader, does not at bottom trust his own judgment. His gambling casinos are failing but his public recognition has never been higher--and that, alas, is only too characteristic of his generation as a whole.
Boomers grew up hearing that they were the greatest children of the greatest country that had ever existed. Sadly, the United States from 1946 through 1964--the years in which the Boom generation, properly defined, was first becomign aware of the world around it--was, with all its faults, perhaps the most just modern society that had yet been created, and seemed to be heading pretty consistently in the right direction. But it did not, inevitably, meet the standards of perfection it claimed for itself, and beginning in 1965 the Boom generation began seizing upon its remaining flaws (encouraged, to be sure, by our parents' great mistake, the Vietnam War), and tearing down their achievements. And now, as a Boomer Administration tries to wipe out the whole legacy of the New Deal once and for all, those of us with cooler heads wonder why it can be so important to the Bush Administration to destroy the principles of domestic and foreign policy under which they have lived their whole lives. The answer, at bottom, I fear, is that our parents believed in them. Unfortunately, on that point our parents were right.
Boomers, on the whole, want to be valued for what they are rather than what they have done. That is why identity politics, rather than achievement, dominate present-day academia--the first institution Boomers managed to transform. That is why Boomer businessmen feel no obligation to anyone but themselves. That is how George Bush managed to run a successful re-election campaign despite a record of unremitting disaster at home and abroad. His supporters voted for the man, not his record--and John Kerry, sadly, tried to beat him in the same way. That's why Donald Trump remains a national figure of some note without having ever done anything but build garish buildings and unsuccessful casinos.
And all the while, Boomers have clung to another fantasy we inherited from our parents--that history moves ever forward, and that nothing we might do could turn us on to the wrong path. As the Greeks recognized, a contrary paradox moves history. Greatness leads to hubris and to destruction; but on the other hand, defeat and chaos provide the chance for real greatness to emerge once again. A few Boomers have managed to keep their heads, and some may still step foward, five or ten years from now, when ideological conservative rule has led the nation to the brink of collapse. So it was in 1861 and 1933, and so it may be yet again--either in 2009 or 2013, or perhaps, if we really do change into an authoritarian nation of massive inequality and widespread poverty, in another eighty years, when generations yet unborn manage to put the United States back on the right path again.

About Me

Since 1976 I have been a historian of international and domestic politics, as well as an authority on some of the more famous criminal cases in American history. For the past eight years I have been using this space to comment on current events. Links to my books, including, The Road to Dallas: The Assassination of John F. Kennedy (2008), appear above, at the top right corner of this page.. Simply click to learn more about them or to order them.
The email circulating widely attributed to me comparing President Obama to Adolf Hitler is a forgery: see snopes.com/politics/soapbox/proportions.asp.
Comments are welcome, but comments that are both abusive and anonymous will be deleted.